Don’t Let Regulators Shut The Door On Leveraged ETFs
The Dynamic Wealth Report
September 11, 2009
One Trade Your Broker Won't Tell You About
by Corey Williams, Editor
As the resident ETF expert, I’m always on the lookout for new
ways to make money with these wonderful financial tools. Some of the
most exciting developments over the last few years are the leveraged and
inverse ETFs.
As a regular reader of the Dynamic Wealth Report, you’ve seen me write
about these before. I’m a big fan of leveraged and inverse ETFs.
But I’m sorry to say if you have a managed account at some big bank or
brokerage, you’ll never hear about some of the most exciting new
products.
It’s not because your broker doesn’t want you to make money. It’s not
because he doesn’t know about these products (the smarter brokers do).
They’re not allowed to offer these ETFs to anyone.
Here’s the deal.
Regulators are turning up the heat on anyone involved with leveraged
ETFs. The list includes the ETF providers like Profunds’ ProShares and
Deutsche Bank’s Powershares. They’re also looking at brokers and the
exchanges.
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All of the extra attention from regulators has some major players
running scared.
Take Wells Fargo for example. They’re no longer offering leveraged or
inverse ETFs to anyone with a managed account. And Deutsche Bank is
shutting down one of its most popular leveraged ETFs.
The reason brokers are pulling these products off the shelf is FINRA
(Financial Industry Regulatory Authority). They sent a ‘shot across the
bow’ of brokers reminding them they’re looking over their shoulder. And
it got everyone’s attention.
FINRA’s main point of contention is the investor’s suitability to these
types of investments. The fact is leveraged ETFs deliver the targeted
return for one day. But the relationship can breakdown over time periods
longer than a single day. And the effects are amplified in times of
increased volatility, like we’ve had the past year.
Their conclusion is leveraged and inverse ETFs aren’t suitable for
buy-and-hold investors with a long term time horizon. (But if you’ve
read the prospectus or their website, you’d already know this.)
The truth is I don’t think regulators are done, not by a long shot. It’s
going to get more difficult to trade leveraged and inverse ETFs. In the
not so distant future, you’ll need specific approval, like option trading
already requires, to trade them.
Regulations aside, here’s why I like these leveraged and inverse ETF so
much… Take a look at the recent move of the first ETF to offer three times
(300%) leverage of the S&P 500. It’s the ProShares UltraPro S&P 500
(UPRO).
In the last six days, the S&P 500 is up just under 5%, but
UPRO is up better
than 15%.
It’s a great way to turn a decent profit into a windfall. And you can do
it in a short time frame.
As long as you understand these ETFs, they can deliver some impressive
gains. In my opinion, they’re best used for speculation with a short time
horizon. Make sure you take the time to understand the regulator’s
‘game’. You don’t want to be left on the outside looking in…
• Intel (INTC) was upgraded by Roth Capital this
week. They now have a buy rating on the stock. Management recently
increased their revenue and earnings guidance.
• Daimler (DAI) was downgraded to an “underweight”
rating by HSBC Securities. They’re concerned the post-stimulus era of
2010 could bring another downturn in the industry.
• Wells Fargo started coverage on Take-Two (TTWO) this
week with an outperform rating. The gaming software company recently
beat Q3 earnings estimates.
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